Traditional debt crisis signs of crashing currencies, 1,000 basis point bond spreads and burned FX reserves point to a record number of developing nations now in trouble.

Lebanon, Sri Lanka, Russia, Suriname and Zambia are already in default, Belarus is on the brink and at least another dozen are in the danger zone as rising borrowing costs, inflation and debt all stoke fears of economic collapse.

Totting up the cost is eyewatering. Using 1,000 basis point bond spreads as a pain threshold, analysts calculate $400 billion of debt is in play. Argentina has by far the most at over $150 billion, while the next in line are Ecuador and Egypt with $40 billion-$45 billion.


Crisis veterans hope many can still dodge default, especially if global markets calm and the IMF rows in with support, but these are the countries at risk.

ARGENTINA
The sovereign default world record holder looks likely to add to its tally. The peso now trades at a near 50% discount in the black market, reserves are critically low and bonds trade at just 20 cents in the dollar – less than half of what they were after the country’s 2020 debt restructuring.

The government doesn’t have any substantial debt to service until 2024, but it ramps up after that and concerns have crept in that powerful vice president Cristina Fernandez de Kirchner may push to renege on the International Monetary Fund.

UKRAINE
Russia’s invasion means Ukraine will almost certainly have to restructure its $20 billion plus of debt, heavyweight investors such as Morgan Stanley and Amundi warn.

The crunch comes in September when $1.2 billion of bond payments are due. Aid money and reserves mean Kyiv could potentially pay. But with state-run Naftogaz this week asking for a two-year debt freeze, investors suspect the government will follow suit.

TUNISIA
Africa has a cluster of countries going to the IMF but Tunisia looks one of the most at risk.

A near 10% budget deficit, one of the highest public sector wage bills in the world and there are concerns that securing, or a least sticking to, an IMF programme may be tough due to President Kais Saied’s push to strengthen his grip on power and the country’s powerful, incalcitrant labour union.

Tunisian bond spreads – the premium investors demand to buy the debt rather than U.S. bonds – have risen to over 2,800 basis points and along with Ukraine and El Salvador, Tunisia is on Morgan Stanley’s top three list of likely defaulters. “A deal with the International Monetary Fund becomes imperative,” Tunisia’s central bank chief Marouan Abassi has said.

GHANA
Furious borrowing has seen Ghana’s debt-to-GDP ratio soar to almost 85%. Its currency, the cedi, has lost nearly a quarter of its value this year and it was already spending over half of tax revenues on debt interest payments. Inflation is also getting close to 30%.

EGYPT
Egypt has a near 95% debt-to-GDP ratio and has seen one of the biggest exoduses of international cash this year – some $11 billion according to JPMorgan.

Fund firm FIM Partners estimates Egypt has $100 billion of hard currency debt to pay over the next five years, including a meaty $3.3 billion bond in 2024.

Cairo devalued the pound 15% and asked the IMF for help in March but bond spreads are now over 1,200 basis points and credit default swaps (CDS) – an investor tool to hedge risk – price in a 55% chance it fails on a payment.

Francesc Balcells, CIO of EM debt at FIM Partners, estimates though that roughly half the $100 billion Egypt needs to pay by 2027 is to the IMF or bilateral, mainly in the Gulf. “Under normal conditions, Egypt should be able to pay,” Balcells said.

KENYA
Kenya spends roughly 30% of revenues on interest payments. Its bonds have lost almost half their value and it currently has no access to capital markets – a problem with a $2 billion dollar bond coming due in 2024.

On Kenya, Egypt, Tunisia and Ghana, Moody’s David Rogovic said: “These countries are the most vulnerable just because of the amount of debt coming due relative to reserves, and the fiscal challenges in terms of stabilising debt burdens.”

ETHIOPIA
Addis Ababa plans to be one of the first countries to get debt relief under the G20 Common Framework programme. Progress has been held up by the country’s ongoing civil war though in the meantime it continues to service its sole $1 billion international bond.

EL SALVADOR
Making bitcoin legal tender all but closed the door to IMF hopes. Trust has fallen to the point where an $800 million bond maturing in six months trades at a 30% discount and longer-term ones at a 70% discount.

PAKISTAN
Pakistan struck a crucial IMF deal this week. The breakthrough could not be more timely, with high energy import prices pushing the country to the brink of a balance of payments crisis.

Foreign currency reserves have fallen to as low as $9.8 billion, hardly enough for five weeks of imports. The Pakistani rupee has weakened to record lows. The new government needs to cut spending rapidly now as it spends 40% of its revenues on interest payments.

BELARUS
Western sanctions wrestled Russia into default last month and Belarus now facing the same tough treatment having stood with Moscow in the Ukraine campaign.

ECUADOR
The Latin American country only defaulted two years ago but it has been rocked back into crisis by violent protests and an attempt to oust President Guillermo Lasso.

It has lots of debt and with the government subsidising fuel and food JPMorgan has ratcheted up its public sector fiscal deficit forecast to 2.4% of GDP this year and 2.1% next year. Bond spreads have topped 1,500 bps.

NIGERIA
Bond spreads are just over 1,000 bps but Nigeria’s next $500 million bond payment in a year’s time should easily be covered by reserves which have been steadily improving since June. It does though spend almost 30% of government revenues paying interest on its debt.

“I think the market is overpricing a lot of these risks,” investment firm abrdn’s head of emerging market debt, Brett Diment, said.

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Sri Lanka has not reached any initial agreement with the IMF on debt relief, and its largest creditors -the Asian Development Bank (ADB) and the World Bank – are urged to come up with a package that would speed up its debt restructuring process, Sri Lanka’s Ambassador to China Palitha Kohona told the Global Times in an exclusive interview on Friday, while also calling for more assistance from partners after the debt-ridden country claimed bankruptcy and imposed a state of emergency amid escalating protests and persisting shortage of daily necessities.

“The IMF visited Sri Lanka at the end of last month, and judging by report we received the official discussions were very satisfactory. We have appointed a team of legal advisors in London, and team of experts who understand debt restructuring from the West,” Kohona said. But he noted that discussions with the IMF are only at a preliminary stage, and once the new government is installed, there will be new arrangement for the next meeting with the IMF.

Kohona said it is hoped that terms and conditions attached to the IMF package will not be “onerous.”

“It’s inevitable whenever the IMF comes along we will have to tighten our belt, but in some cases it’s difficult because the belt is already on the last notch. We’re worried that the IMF may insist that we curtail our state-fund health care system. The education system which is free from grade one to university level might be another area the IMF recommends to cut. These may add to the unrest,” Kohona explained.

Sri Lanka’s largest creditors are international financial organizations like the World Bank and the ADB, and a substantial amount is also owed to other institutional investors from the West, for example the Wall Street. While calling on those organizations to take a bigger role, Kohona also hopes more bilateral partners will provide more assistance to help the country overcome its difficulties.

China and Japan each held about 10 percent of Sri Lankan debt. Kohona disclosed that about $1 billion, out of Sri Lanka’s $7 billion foreign debt obligations for this year, is due to China.

China’s Foreign Ministry spokesperson Wang Wenbin said at a press briefing on Friday that Chinese financial institutions have actively approached and negotiated with Sri Lanka after the country stopped debt repayment, expressing willingness to properly settle matured debts owed to China and help it overcome difficulties.

“China is ready to work with relevant countries and international financial institutions to continue to play a positive role in supporting Sri Lanka’s response to current difficulties and efforts to ease debt burden and realize sustainable development,” Wang said, adding that as a friend and neighbor, China has been providing assistance for its socioeconomic development to the best of our capacity.

Recently, China has announced a total of 500 million yuan ($74 million) emergency humanitarian aid to Sri Lanka. On Thursday, the second batch of emergency humanitarian grain aid – 1,000 tons of rice – from China was handed over to Sri Lanka.

There have been large-scale protests about the government because of the severe material and energy shortages that Sri Lanka is facing, Kohona noted. Sri Lanka faces a gap in cooking oilfertilizer, medicine, and even food stocks, which poses a huge challenge to Sri Lankans’ basic household cooking, transportation, medical needs, and preparation for the upcoming cultivation season.

On Thursday, President Gotabaya Rajapaksa officially resigned after landing in Singapore, and Prime Minister Ranil Wickremesinghe was appointed as acting president. Wickremesinghe declared a state of emergency across the country, BBC reported.

Kohona noted there are still protests in Sri Lanka against Wickremesinghe, and he is not clear whether the acting president will continue to hold this office for much longer. “This is very unsatisfactory, because the leadership of the country suddenly comes into question. So we are hoping that the constitutional provisions will be followed, and elections have to be held within a specified period to elect a new president,” he said.

Sri Lanka’s parliament will vote on a new president on July 20, according to the speaker of the Sri Lankan Parliament.

Kohona said he is confident that “whatever government in power will maintain excellent relations with China.”

“China is the major trading partner and investor of Sri Lanka, we have a strategic partnership between the two countries, whoever takes over the government after an election will maintain the confidence of the Chinese government as well as the goodwill of the Chinese people,” he noted.

In recent years, Chinese-invested projects under the Belt and Road Initiative (BRI) such as the Hambantota Port have largely improved local people’s livelihood and propelled the country’s growth.

On Thursday, the Chinese Embassy in Sri Lanka held a video conference with Chinese firms in Sri Lanka, guiding them on how to strengthen security work and cope with demonstration and safety events. Kohona said there has been no threat to Chinese projects or Chinese personnel in Sri Lanka.

“BRI investments are critical in Sri Lankan economy after the situation stabilizes. It not only brought foreign exchange, but also generated employments,” he said, adding that the embassy is encouraging a number of Chinese renewable energy companies to establish projects in Sri Lanka.

Global times

The fuel crisis has had an extremely serious impact on people’s lives by now. Government employees are restricted from being summoned to offices. Schools are not held. Vegetable farmers have not been able to send their crops to economic centers. The tea industry is in a serious problem as it is not possible to send the tea leaves to the tea factories every day. Even the shelves of shops in distant areas away from Colombo are slowly becoming empty because the transportation of goods from Colombo is limited.

If we have to continue in this way, there is a possibility that many industries such as agriculture and businesses in the country will completely collapse. Hospitals may not even be able to transport the necessary medicines. The number of hours of daily power cut has increased so much that it is impossible to come to a point where the entire country will stop. Depending on the way things are developing, the day is not far when a pregnant mother who is about to give birth cannot find a vehicle to go to a hospital, and the patient cannot be taken to a hospital in case of an emergency snake bite.

It is true that several fuel ships are due to arrive in Sri Lanka this week. But it is also true that in the long term, there is no sign of a solution to this fuel crisis.

It is a well-known fact that this fuel crisis is caused by the lack of foreign exchange that we are facing as a country. Most of the country’s monthly import expenditure is allocated to the import of fuel.

What Greece did…

Greece, just like us, is a country that has faced a foreign exchange crisis before us. There they wanted to reduce their fuel demand by 50%. What they did was, they increased fuel prices by 50%. Accordingly, the price of a liter of petrol in Greece is 2.35 US dollars (857 rupees). A liter of diesel costs US$ 2.02 (Rs 737).

With the extra money received by the government through this price increase, they arranged to provide diesel at subsidized rates for public transport. Through that, they were able to reduce public transport fares by 10% compared to the amount before the arrival of the Covid epidemic situation.

Now there are no fuel queues in Greece. Relief has also been provided to the public due to the reduction in public transport fares. Also, foreign tourists are coming to Greece and foreign exchange inflows are also increasing.

It is stated that through the above program they have been able to reduce fuel demand by 43%.

Why can’t SL do that?

Considering the situation in Sri Lanka, according to the current monthly income, we have enough money to bring fuel for about 15 days. Accordingly, we also have to reduce fuel demand by 50%. We will also be able to reverse this situation when the country starts receiving foreign exchange income through the tourism industry.

But the question is why the authorities do not directly announce this situation to the people and go to a solution like Greece.

Sri Lanka is continuing negotiations with China for as much as US$4 billion in aid and is confident Beijing will agree “at some point,” according to a top envoy.

Colombo is asking China for a loan of $1 billion to repay an equivalent amount of Chinese debt coming due this year, Palitha Kohona, Sri Lanka’s ambassador to China, said in an interview to Bloomberg Television Friday. It is also seeking a $1.5 billion credit line to pay for Chinese imports and activation of a $1.5 billion swap, he added.

“We are confident that at some point the Chinese system will agree to our requests because these are not unreasonable requests,” Kohona said. “We have made similar requests to other creditors. Sri Lanka needs the funding to bring stability to our financial system and we are confident that the Chinese will come to the party sooner than later.”

The bankrupt South Asian country has received about $3.8 billion in aid from neighbor India, and is negotiating for more. The cash is needed to pay for food and fuel purchases, with severe shortages seen stoking inflation to 70%, triggering violent public protests and forcing President Gotabaya Rajapaksa to flee the nation and resign.

Sri Lanka’s federal government has about $12.6 billion in outstanding bonds owed to global funds; all repayments are frozen and defaults have been recorded. It owes roughly an equivalent amount to bilateral creditors and multilateral lenders.

Some 10% of Sri Lanka’s external debt is owed to China, Kohona said. Acting President Ranil Wickremesinghe had told Bloomberg News earlier that Japan is owed roughly an equal share but the interest rates on Chinese loans are higher. Wickremesinghe is seeking a bailout from the International Monetary Fund.

India has urged the IMF to treat all of Sri Lanka’s creditors on par. China is concerned about potential delays in repayments if the agreed $1.5 billion swap is included in IMF talks, Sri Lankan authorities have said. Kohona declined to say if China will permit Sri Lanka to tap the swap but said this line won’t be included in IMF talks.

Kohona on Friday said Sri Lanka’s relationship with “close, vital neighbor” India isn’t dependent on the island’s “warm, proximate” relationship with China. He added that China-Sri Lanka relations will survive the departure of Rajapaksa, who was seen as close to Beijing.

“The president has gone, but in the coming weeks we will decide on a successor,” Kohona said. “What we went through was a popular uprising, a popular expression of disenchantment. The people have expressed themselves.”